Traders say people caught between the sell and buy imbalances lost money.

TRADERS in General Motors and General Motors Hughes stock were not a happy bunch this week.

Last Tuesday, when the entire market was rallying nicely, the specialist firm in charge of keeping an orderly market in GM and GM Hughes stock put out a notice at 3:40 p.m. that there was a huge sell-side imbalance of 3.5 million GM shares. It also said there were 1.3 million GM Hughes shares to sell at the closing bell.

But the sell imbalance changed in just a few minutes and became – in both stocks – a large imbalance on the buy side. The sudden shift left traders scratching their heads and pondering the losses they suffered as the stock prices gyrated wildly.

Worse, moments later the entire order flow for GM and GMH was jammed up when a computer glitch turned a single instruction to cancel a small order into 10,000 such cancellations. First, the story about the imbalances.

What that means is simple. Someone, or likely more than one someone, was planning to sell a whole lot of both these stocks at the last seconds of the trading session.

Enough stock that the price would be affected and that the specialist on the trading floor was required to make a disclosure of the upcoming action. Both stocks fell in price, but – especially in the case of GM Hughes (GMH) – not nearly as much as traders expected with that amount of anticipated selling.

This sell imbalance was odd in the first place because the whole market was going higher. And traders noticed that neither stock fell very much on the indications that there was going to be a lot of selling.

Then at 3:52 p.m., the sell imbalance suddenly disappeared and became a buy imbalance.

In other words, the floor was now telling traders that nobody was trying to unload 3.5 million GM shares and 1.3 million GMH anymore. Instead, the new report was that there were now orders to buy a total of 800,000 GM and 1.46 million GMH shares.

This sort of reversal isn’t supposed to happen, but it can on a busy day.

What bothered traders was that both stocks rose sharply when the late buying was revealed – a much bigger reaction, they say, than the drop in price when the sell imbalances were revealed.

Traders say people caught between the sell and buy imbalances lost money.

No correction was put on the tape, so nobody was contending that the first sell imbalance was just an honest mistake.

The NYSE didn’t comment on this, but sources say the buyers could have shown up right after the sell imbalance was publicized.

But there were other problems in GM trading.

“At the same time (the NYSE) was experiencing some kind of problem with its automated order entry system. It took us eight minutes to execute a market order which should have been executed within three minutes, according to NYSE rules,” said one trader who was still feeling the sting.

“Obviously the prices we received after eight minutes were far less favorable than had the order been executed after three minutes,” he said.

The NYSE says this problem resulted from a firm that it didn’t identify accidentally sending the 10,000 cancel orders to the trading floor. The Exchange said the problem was fixed without anyone getting an unfair price.

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So far the market is doing pretty well, and performing as expected for this time of year.

Stocks rose sharply this week, as they should have. In last Friday’s column I explained that traders sometimes use nothing more than past performance during a certain week, day or even time of day when deciding to buy stocks.

And the week of Memorial Day is almost always a winner. Helping the market were signs that the economy is slowing.

But a private economic survey followed by Alan Greenspan shows that while the economy’s manufacturing segment may be slowing down, the service sector – which makes up 80 percent of the economy – isn’t.

So don’t expect any change in interest rate thinking at the Fed. If anything, the market’s irrational jump this week will make the Fed more nervous when it meets later this month.